Social Security can become an important source of income for you once you retire. And so it’s important to keep as many of your benefits as possible. These three moves will help you do that.
1. Move to a tax-free state
There are 13 states that tax Social Security income:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
The good news is that most of these states offer exemptions for low- or middle-income earners. But if you expect to have a higher income when you retire, you may want to find another place to call home.
2. Store Your Retirement Savings in a Roth IRA
The federal government also levies taxes on Social Security benefits. Whether you have to pay them depends on your provisional income.
Your provisional income is calculated by taking 50% of your annual benefit total and adding it to your non-Social Security income. Social Security taxes apply when your provisional income reaches $25,000 as a single taxpayer or $32,000 as a married couple filing jointly. But you may not reach those thresholds if you house your nest egg in a Roth IRA.
Roth IRA withdrawals are tax-free and do not count toward provisional income. And so if your only sources of retirement income are Roth withdrawals and Social Security benefits, you may be able to keep the IRS at bay.
3. Don’t earn too much if you work and receive benefits at the same time
Once you reach full retirement age (FRA), you can earn any income without impacting your Social Security benefits. But if you work at the same time and receive benefits before reaching FRA, you will be subject to the earnings test. And once your income exceeds certain limits, you run the risk of some of your benefits being withheld.
At this point, you can earn up to $18,960 without affecting your benefits. Beyond that, you’ve withheld $1 in Social Security for every $2 in income you bring in.
If you reach FRA this year, the profit test cap will rise to $50,520. From there, you get $1 in Social Security withheld for every $3 in income.
In 2022, the profit test limits will be increased to $19,560 and $51,960 respectively. And beyond these limits, benefits will be withheld according to the guidelines mentioned above. So if you want to keep more of your benefits, make sure your earnings don’t reach these thresholds.
By the way, withheld benefits will be refunded to you later, once you reach FRA. But since you have to accept a reduced benefit for applying for Social Security before FRA, you might as well try to avoid losing some of that money temporarily.
Protect your money
Many people can’t wait to get their hands on their Social Security benefits. And since we all pay taxes on our earnings to qualify, it makes sense. Follow these tips so that you can keep as many of those benefits in your own pocket as possible once you start collecting them.